The federal government's unexpected request that tobacco companies be forced to cough up a $10 billion penalty instead of $130 billion for alleged past fraud probably would not have much immediate impact on outstanding bonds backed by national tobacco settlement payments, a municipal bond analyst said yesterday.
Although a penalty of $130 billion might have put intense pressure on tobacco companies that are signatories to the 25-year, $206 billion national Master Settlement Agreement of 1998, "the added cost of a five year, $10 billion stop-smoking campaign spread over the large tobacco companies would not have a significant impact on tobacco bond pricing right now," said analyst Dick Larkin.
Larkin, who works for J.B. Hanauer & Co. in Parsippany, N.J., said he was more concerned about how a $10 billion award could force tobacco prices up and thereby push down consumption in the long run. Moreover, for tobacco bondholders right now, the "biggest threat" is that MSA companies will continue to lose market share to companies that have not signed the agreement, thereby lowering payments under the agreement. Under the so-called non-participating manufacturers clause in the MSA, tobacco bond cash flow could be reduced by 18% or more in 2006 and 2007, Larkin said.
The comments from Larkin came the day after the Justice Department's Civil Division stunned legal observers by asking a federal judge to order the tobacco companies to pay just $10 billion to fund a proposed program to help smokers quit, which is well below the $130 billion price tag government expert witness Michael Fiore had associated with a more ambitious version of the program in his testimony last month. Fiore, a professor at the University of Wisconsin Medical School in Madison, is also director of the school's Center for Tobacco Research and Intervention.
The request from federal lawyers came Tuesday during three days of scheduled closing arguments in U.S. v. Philip Morris USA Inc., a civil racketeering trial, which is being tried here without a jury before U.S. District Judge Gladys Kessler. Closing arguments are expected to conclude today in the trial that began in September.
A Justice Department spokeswoman did not return telephone calls yesterday, but a tobacco industry official said the defendants would continue to vigorously defend the lawsuit. John Wunderli, senior assistant general counsel for Altria Group Inc., parent of Philip Morris, said the government's claim for damages in order to fund a smoking cessation program is "fundamentally flawed."
Even if the government had proposed a program that cost only $10, such a program would still not be legally permissible under the Racketeering Influenced and Corrupt Organizations Act, or RICO, Wunderli said.
The federal government already takes in $7 billion annually in tobacco excise taxes, states take in $11 billion annually in state tobacco excise taxes, and over $5 billion is paid by tobacco companies each year under the MSA, he said.
"A very small percentage of that is being used on tobacco control or cessation efforts, or on any of the ideas that the Department of Justice is spinning out on this case," Wunderli said.
In the ongoing trial, the government is also continuing to press for injunctive relief, such as further restrictions on the defendants' marketing efforts. The companies contend that whatever they may have done wrong in the past is outweighed by the fact that they signed the MSA, which in addition to providing for payments to states and some localities already restricts tobacco marketing.
The trial had been considered significant for the municipal market because a large judgment against the tobacco companies might have slowed or halted payments to state and local governments under the MSA. Four months ago a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit overruled Kessler and determined that the government could not force tobacco companies to pay an estimated $279 billion in past profits they earned by allegedly concealing the dangers of tobacco use.
Disgorgement of ill-gotten gains is a remedy "aimed at past violations" of racketeering laws and does not "prevent or restrain" prospective wrongdoers from future bad conduct, which is the intent of RICO provisions, the appeals court held. The government could still appeal the ruling to the Supreme Court. (c) 2005 The Bond Buyer and SourceMedia, Inc. All rights reserved. http://www.bondbuyer.com http://www.sourcemedia.com
